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The Honolulu Advertiser
Posted on: Thursday, March 13, 2003

Enron executives charged in 'sham'

By James Rowley and Laura Smitherman
Bloomberg News Service

HOUSTON — Two Enron Corp. executives were accused yesterday of concocting $111 million in profit from a venture with Blockbuster Inc., while the energy company was charged in a separate civil case with manipulating natural-gas prices before its bankruptcy in 2001.

In the criminal case involving Blockbuster, Kevin Howard and Michael Krautz, who were executives of Enron's Broadband Services division and still work for Enron, surrendered to the FBI in Houston and were released on $500,000 bond each. The Securities and Exchange Commission filed related civil charges.

The venture involved the purchase of its future revenue stream through an investment structure called Hawaii 125-0.

What Hawai'i connection there might be, if any, to the investment could not be immediately determined yesterday.

More than a half dozen people, including former Enron Chief Financial Officer Andrew Fastow, have been charged with crimes in an accounting scandal that involved off-the-books partnerships to inflate profits. Once the seventh largest U.S. company by sales, Enron filed for bankruptcy in December 2001 as its shares lost $68 billion in value.

"It's safe to assume that there's going to be a steady flow of Enron cases over the coming months," said former federal prosecutor Jacob S. Frenkel, a lawyer at Smith Gambrell & Russell.

Prosecutors said Howard and Krautz created a phony partnership, Project Braveheart, to book nonexistent profits from Enron's joint venture with Blockbuster, the world's largest chain of video rental stores. "Project Braveheart was a sham from its inception," the SEC complaint said.

Each defendant faces up to more than 20 years in prison if convicted, prosecutors said.

Asserting innocence

Howard "is innocent" and "is going to fight this with every breath that he has," said his lawyer, Jim Levine, after a court appearance in Houston for both defendants. Howard had "Enron's best interests at heart."

"It's our corporate policy not to discuss personnel matters," said Enron spokesman Eric Thode, declining further comment.

Separately, the Commodities Futures Trading Commission charged the company and former trading executive Hunter S. Shively with manipulating prices in the natural gas markets. The government has been probing Enron's trading practices during California's energy crisis.

Shively did "nothing illegal," said his lawyer, Susan Brune of New York. "The only reason the CFTC is going after Mr. Shively is that he worked at Enron."

The CFTC also said Enron used its Internet trading site, EnronOnline, to operate illegal futures markets in gas and lumber.

Revenue stream

The Blockbuster partnership sold part of the venture and the future revenue stream to the Canadian Imperial Bank of Commerce, letting Enron report profits for the last quarter of 2000 and the first quarter of 2001, prosecutors and the SEC charged.

Prosecutors said the arrangement was invalid because Enron promised that CIBC wouldn't lose any money and nCube, Inc., a small video technology company, would profit from the venture even if it wasn't successful. The promises were concealed from Enron's auditor, Arthur Andersen LLP, the government charged.

Fastow gave CIBC "his strongest possible assurance that the risk won't be realized," a CIBC banker said in a June 2001 e-mail quoted in the government's 23-page criminal complaint.

Another CIBC banker replied that, while "there can be no documented means of guaranteeing" the bank's investment, "we have a general understanding with Enron that any equity loss is a very bad thing," the complaint said.

This banker predicted that eventually Fastow would be "led away in handcuffs," the affidavit said.

Hawaii 125-0

CIBC purchased the venture's future revenue stream through an investment structure it called Hawaii 125-0.

Howard promised nCube Inc. that it would get all of its investment back plus a profit of $100,000 to $200,000, the complaint said.

"CIBC has cooperated fully with the legal and regulatory authorities," said bank spokesman Rob McLeod. "Our own internal investigations have uncovered no evidence of any illegal or unethical behavior on the part of CIBC staff."

Enron extended the contract with Blockbuster in December 2000 to let it list profits from the sale to CIBC, the complaint said. Blockbuster was able to back out of the contract that month if Enron hadn't signed any agreements with local telephone companies to deliver movies on demand to customers over phone lines, the government said.

The 20-year contract was terminated in March 2001 after Enron had reported the $111 million profit, the complaint said.

"This agreement reflected nothing more than an aspiration," said Neal Batson, the court-appointed examiner investigating Enron, in a report filed with a federal bankruptcy judge in January. Arthur Andersen appraised the value of the contract at more than $120 million, Batson found. The transaction accounted for almost all of the $63 million profit that Enron's broadband services unit reported for the fourth quarter of 2000, he said.